ST8.2 Florida Citrus Inc. (FCI) produces and sells a highly popular sports drink

Question

ST8.2 Florida Citrus Inc. (FCI) produces and sells a highly popular sports drink in the North American markct. In the current year, it will sell 20 million bar- rels of drinks in the Asian market. For many years, it has sold in the Asian market through a Tokyo-based importer. The contract with the importer is up for rencwal, and FCI decides to reconsider its Asiarn strategy. After much analysis, it decides that three alternatives warrant further consideration. Option 1. Stay with the importer: Sell through the current importer who manages all the market ing and distribution of FCI's sports drink in the Asian market. FCI receives a net payment of $5 per barrel (net after transportation costs and import dutics) sold in the Asian market. * Option 2. Move to production licensing: License production of FCI drinks to a Japancsc beverage firm who also will manage its marketing and distribution. This firm will charge FCI a fixcd fee of S5 million each year to cover its costs of maintaining the quality of FCI products. It will pay FCI $10 per barrel of FCI products it sells in Asia. ·Option 3. Turn to self-production: Purchase a fully operational beverage plant from a Japanese company with excess capacity. The annual fixed

Explanation / Answer

a) For option 1:

FCI planning to sell 20 million barrels

FCI receives the net payment = $5 per Barrel

Break Even point = 20 Million / $5 = 4,000,000 Units

For Option 2,

Fixed Cost = $5 Million

FCI will receive price = $10 per Barrel

So Breakeven point = $5 Million / $10 = 500,000 Units

For Option3:

Fixed Cost = $30 Million

Variable Cost = $60 per barrel

Selling price = $100 Per Barrel

So Breakeven point = Fixed Cost / (Selling price – Variable Cost)

                                        = $30 Million / (100 – 60) = $30 Million / 40 = 750,000 Units

b)

If FCI able to sell Q units in Asian Market then,

Operating income in Option 2 = $10 x Q - $5 Million

Operating income in Option 3 = $100 x Q - $60 x Q - $30 Million = $40 x Q - $30 Million

As per question,

The Operating income on option 2 and 3 should be same,

So,

$40 x Q - $30 Million = $10 x Q - $5 Million

=> $40 x Q – 10 x Q = $30 Million - $5 million

=> $30 x Q = $25 Million

=> Q = $25 Million / $30

=> Q = 833,333

So for sales of 833,333 units in Asian Marker, FCI will report same Operating income in option 2 and option 3

c)

If Sales volume is 800,000,

Net income in Option 2 = $10 x 800,000 - $5 Million = $3 Million

Net income in Option 3 = $40 x 800,000 - $30 Million = $2 Million

If Sales volume is 833,333,

Net income in Option 2 = $10 x 833,333 - $5 Million = $3,333,330

Net income in Option 3 = $40 x 833,333 - $30 Million = $3,333,330

If Sales volume is 950,000,

Net income in Option 2 = $10 x 950,000 - $5 Million = $4,500,000

Net income in Option 3 = $40 x 950,000 - $30 Million = $8,000,000

If sales volume is more than 833,333 and less than 950,000 the option 3 should be chosen and if sales volume is between 800,000 and 833,333 then Option 2 should be chosen.

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